Sunbeam 2005 Annual Report Download - page 22

Management’s Discussion and Analysis of Financial Condition and
Results of Operations (cont’d)
Gross margin percentages on a consolidated basis decreased to 32.8% in 2004 from 36.3% in 2003. The
principal reasons for this decrease are the impact of the acquisitions completed in the last sixteen months
which have relatively lower gross margins, higher distribution costs in our branded consumables segment, a
shift to lower priced FoodSaver®machines in our consumer solutions segment and the effect of the
contractual tolling changes in our other segment as discussed above.
SG&A expenses decreased as a percentage of net sales from 24.1% in 2003 to 21.4% in 2004. The
decrease in percentage terms was principally due to the inclusion of the acquisitions completed during 2003
and 2004 which have relatively lower SG&A expenses as a percentage of net sales, and to spending not
increasing at the same rate as organic growth. The increase in dollar terms, from $142 million in 2003 to
$179 million in 2004, was principally the result of the acquisitions completed during 2003 and 2004, higher
sales and marketing expenses in our branded consumables segment and higher validation costs incurred for
new business development projects and higher employee compensation costs in our other segment,
partially offset by lower media spending, lower legal costs and lower employee compensation costs in the
consumer solutions segment.
We reported operating earnings of $96.0 million in 2004 compared to operating earnings of $71.5
million in 2003. This increase of $24.5 million included non-cash restricted stock charges of approximately
$32.4 million and $21.8 million in 2004 and 2003, respectively. Excluding these non-cash restricted stock
charges, our operating earnings would have been 37.8% higher in 2004 than 2003. The principal reason for
this increase was the effect of our 2003 and 2004 acquisitions. Due to the integration of certain of our
acquisitions it is no longer possible to compare the operating earnings, exclusive of acquisitions, in the
branded consumables segment with the prior year. The operating earnings of our consumer solutions
segment decreased by $5.5 million principally due to the sales effects discussed above. The operating
earnings of our former plastic consumables segment decreased by $2.9 million due to higher plastic resin
prices which were not passed through to our branded consumables segment with respect to plastic cutlery
products and higher validation costs incurred for new business development projects, partially offset by the
sales effects discussed above. Operating earnings of our other segment increased by $3.5 million due
primarily to the sales effects discussed above.
During the fourth quarters of 2004 and 2003, we recorded non-cash compensation costs related to
restricted stock of approximately $32.4 million and $21.8 million, respectively, resulting from the lapsing of
restrictions over restricted stock issuances to certain executive officers.
Net interest expense increased to $27.6 million in 2004 compared to $19.2 million in 2003. This
increase was primarily due to higher levels of outstanding debt in 2004 compared to 2003, resulting from
the additional debt financing required to fund the acquisitions completed in the last sixteen months.
Our effective tax rate in 2004 was 38.0% compared to an effective tax rate of 39.2% in 2003.
Our diluted earnings per share increased from $0.90 in 2003 to $0.99 in 2004 or, in percentage terms,
by 10.4% over the prior year. Given our diluted weighted average shares outstanding in 2004 and 2003 of
42.7 million and 35.3 million, respectively, the effect of the non-cash restricted stock charges discussed
above was to reduce our diluted earnings per share amounts reported under GAAP by $0.47 and $0.37 in
2004 and 2003, respectively.
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